All asset managers will have to return to investors in their funds any profits made from lending out securities in Europe under new rules that threaten to wipe out a lucrative source of revenues for some of the world's biggest investment firms.
The rules set by Europe's main market regulator aim to to ensure that fund investors gain the benefit from securities lending, a common practice across the fund management industry.
Typically shares or other assets held in a portfolio are lent to a party such as a hedge fund return for a fee, usually to aid short-selling transactions - where a speculator sells a borrowed security in the hope of buying it back at a cheaper price before returning it.
The new rules from the European Securities Markets Authority are expected to come into force from next February and are likely to hit big asset managers, particularly those with large index tracking funds or exchange traded funds business such as BlackRock.
Some industry analysts say the rules could reduce short-selling activity if asset managers decide it is unecomic to carry out securities lending.
Fund managers argue that securities lending improves returns and reduces costs for investors. But estimates for how much revenue is generated by securities lending are rare as market participants are notoriously secretive about their activities.
